Convergence has limited value for telecom service providers

The concept of a value chain is the effect of successively building one product or service on top of another, with the value increasing at each step. It is a useful management tool, and is continually used to expound various business models in the information, telecom and media industries. One example of moving up the value chain is: optical fibre services, broadcast distribution services and content production services. But, what does convergence mean? First, we need to distinguish three concepts using the following simple definitions, while recognizing I am skipping some of the challenging details. Bundling is a pricing exercise, selling two or more goods or services as a package. Integration occurs when two or more facilities become combined, yet retain their individual identities. Convergence occurs when two or more functions are performed by a single facility, having previously required two or more facilities. You don’t have to agree with my definitions as long as you accept the broad distinctions.
Many consultants and writers imply that simply moving up the value chain will be of benefit to a service provider. Unfortunately, the value is that perceived by the customer, not necessarily by the supplier. Service providers are convinced that success equals ascending the chain and that convergence will be the major enabler. This is absurd. A service provider has at least two ways of moving up the chain. For example, it could stop providing network infrastructure and start providing application services, or it might provide both types of service. The second approach is often associated with convergence; however, it is simply an example of old-fashioned, vertical business integration.
When you are able to use the same wires to obtain telephone and television services, that is convergence at one functional level. When you are able to use the same terminal to access television broadcasts and the Internet, it is convergence at another functional level. But frequently what is happening is integration. A classic example is the coffee-making alarm clock, which is simply integration through physical packaging. This distinction between convergence and integration is important in understanding where fundamental changes in an industry are more likely to happen. For example, the Internet could displace newspaper deliveries, but never the content production. Generally, distribution facilities might displace other distribution facilities, and production facilities might displace other production facilities, but production facilities can never displace distribution facilities or vice versa. There could be compelling business reasons for vertical business integration. However, anticipating some impossible act of convergence should not be one of them.
Technological convergence can result in the displacement of older technologies and can achieve significant economies of scale, but its limitations must be recognized. Understanding those limitations is as important to the IT department as it is to the service provider. Neither group should plan on the basis of faith in what is not possible. The value-chain is simply a business tool, not a target business model. Maintain a clear distinction between convergence and integration. Technological convergence occurs only horizontally and can effectively link different value chains, but it does not displace value layers.

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Jim Love, Chief Content Officer, IT World Canada

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